Raymond James: Kimbell Royalty (KRP.US) faces short-term headwinds, rating lowered to "hold, wait and see"

On Monday, Raymond James downgraded Kimbell Royalty Partners (KRP.US) from a "strong buy" to a "hold" rating, citing some recent unfavorable factors such as the A-round redemption and the 2025 fiscal year production guidance of 255,000 barrels of oil equivalent per day being lower than expected. Kimbell's quota for 2025 has significantly decreased compared to Raymond James' forecast, attributed to weaker production prospects and lower commodity prices than previously predicted. The 2025 quota of approximately $1.63/unit still represents a yield of over 10%, but analyst John Freeman believes there are more attractive opportunities for returns elsewhere in the industry. Freeman noted that in the third quarter of 2023, Kimbell privately placed $325 million of A-series convertible preferred stock at a 6% interest rate to partially fund the $255 million acquisition of Permian and Mid-Con. It is expected that 50% of the units will be redeemed at the lowest price in May 2025, with the remaining half to be redeemed later, but redemption costs increase each quarter after the second quarter of 2025. The analyst admitted that he had not previously considered the potential negative impact of the redemption process, and now hopes to acknowledge this more cautiously, although he "100%" agrees with the decision to redeem these units as the cost of redemption increases over time.